FEASIBILITY AND COST BENEFIT ANALYSIS TOOLS 

As a Systems Analyst , you need to know how to calculate a project's cost and Benefits when conducting a Preliminary Investigation, Evaluating Projects, and making recommendations to management.  Indeed, the Systems Analyst  must analyze a project's Costs and Benefits at the end of each Project development Phases (i.e SDLC)  so that management can decide whether or not to continue with the Project  development effort.

However, before you conduct Economic Feasibility you must learn how to identify and classify all Costs and Benefits.

COST CLASSIFICATIONS

Costs can be classified as :-  
                                                                    Direct Costs or Indirect Costs
                                                                    Fixed Costs or Variable Costs
                                                                    Development Costs or Operational Costs.
                                                                    Tangible Costs or  Intangible Costs

 DIRECT COSTS
                                             
Are Costs that can be associated with the development of a specific System.  Example of Direct Costs include the Salaries of Project team members, Purchase or lease of Hardware and Software that is used only for the new System.

INDIRECT COSTS (Overhead Expenses)

Are those costs that can not be attributed to the development of a particular Information System.  For example; The Salaries of Network Administrators, Database Administrators, Copy Machine rentals and insurance expenses are the example of Indirect Costs.


FIXED COSTS

Are Costs that  are relatively constant and do not depend on a level of activity or effort.  Many Fixed costs recur regularly, such as Salaries and Hardware rental charges,  office rent  etc.

VARIABLE COSTS

Are Costs that that vary depending on the level of activity.  Example:- The Costs of Printer stationary paper, ribbon, telephone line charges, electricity etc are Variable costs.

DEVELOPMENT COSTS

Are incurred only once at the time the System is developed or acquired.  This costs might include salaries of people involved in Systems Development, Software purchase, initial User Training, and the purchase of Hardware and accessories .

OPERATIONAL COSTS

Are incurred after the System is implemented and continue while the System is in use.  Examples might include Systems maintenance,  ongoing Training, annual Software License fees annual Maintenance contract fees, and Communications expense.

TANGIBLE COSTS

Are Costs for which you can assign a specific monetary value (i.e Dollar value).  Examples of Tangible Costs include Employee Salaries, Hardware and Software purchase, and office Supplies.

INTANGIBLE COSTS

Are those costs whose monetary (Dollar) value cannot be calculated easily. Examples might include the Cost of Customer dissatisfaction, lowered employee morale, reduced information availability  etc.  However, if an Analyst examines an Intangible Cost  item carefully, it is sometimes possible to estimate a dollar value for it.  For example; Users might dislike a System because it is difficult to learn and operate .  The Users dissatisfaction is an Intangible Cost, but if it translate into an increase in errors that must be corrected, you probably could assign a Tangible Dollar Cost.  "You should try to work with Tangible Costs whenever possible".


Note that  Some Costs apply to more than one category of Expenses. For example; Overtime pay for clerical help during the Systems Analysis Phase might be considered as Development Costs, Variable Cost, and Direct Cost.  Again, a Monthly fee for maintaining the company's Web Site might be Operational Cost, Fixed Cost, and Indirect Cost.

 

BENEFIT CLASSIFICATIONS

Like cost Benefits can be classified as:-  

                                                                          Tangible  Benefits
                                                                           Intangible Benefits
                                                                           Fixed Benefits
                                                                           Variable Benefits
                                                                             
Another Benefit classification relates to the nature of the Benefit:- 
                                                                            
                                                                           Positive Benefits                   
                                                                           Cost- avoidance Benefits

  •   POSITIVE BENEFITS:    increases revenues, improves services or                                     
                                                   otherwise contributes to the organization as a direct 
                                                   result of the new System.  Examples of Positive Benefits include 
                                                   improved information availability, greater flexibility, faster 
                                                   service to customers, higher employee morale, and better    
                                                   Inventory management.

  • COST-AVOIDANCE BENEFIT  Refers to expenses that would be necessary if new 
                                                             System is not installed. Examples include Handling the
                                                             work with current staff instead of hiring additional          
                                                             people, not having  to replace existing hardware or       
                                                             software and avoiding problems that would otherwise be 
                                                             forced with the current System.

                                                            
    Cost-avoidance Benefits are just as important as Positive 
                                                             Benefits and must be considered both types of Benefits 
                                                             when performing Cost-Benefit Analysis.

A Project is Economically Feasible if the future benefits outweigh the estimated costs of         
developing or acquiring the new Computer System.                                                                         .




COST- BENEFIT ANALYSIS

Cost-Benefit Analysis is the process of comparing the "Anticipated Costs" of an Information System to the "Anticipated Benefits".

Cost-Benefit Analysis is performed throughout the Systems Development Life Cycle (SDLC) to determine the Economic Feasibility of an Information System Project and compare alternative solutions.

Many different Cost-Benefit Analysis techniques exist.  However, we will discuss only the three most common Cost-Benefit Analysis methods; namely Payback Analysis method (PBA), Return On Investment Analysis method (ROI) and Present Value Analysis Method (PV).


                                     |RETURN |             | COST BENEFIT ANALYSIS METHODS|